Strong points

Omicron variant, geopolitics obscures prospects for oil

Reduction of the available capacity to impact the dynamics of the alliance

Prince Abdulaziz warns traders not to bet against OPEC +

After 11 meetings in 2021 to deal with an erratic oil market, OPEC and its Russian-led allies do not appear to have a break in 2022, as the coronavirus pandemic and geopolitics are expected to keep ministers on their toes.

By October, the OPEC + alliance hopes to complete its comeback after the record production cuts implemented in mid-2020, with its plan to gradually increase quotas by 400,000 bpd each month.

But the increasingly prevalent omicron variant may hinder, and later, planned releases of strategic oil reserves by the United States and other key consumer countries and a possible Iran nuclear deal present considerations of supply for OPEC + members.

The producer bloc, which controls around half of the world’s oil supply and marked five years of cooperation in December, will have to continue calibrating its production policy through its monthly rallies, while managing internal rivalries over shares of oil. market which sometimes boiled.

“OPEC + is about to take a hiatus or cut if conditions warrant it,” said Ehsan Kohman, head of emerging markets research at investment bank MUFG. “What is clear is that a huge cloud of uncertainty hangs over global oil markets with volatility reaching its highest level since May 2020.”

The next OPEC + meeting is scheduled for January 4, although ministers have kept the last one which met on December 2 open, pending more concrete data on omicron’s impacts.

The variant has already slowed trade activity as countries adopt travel restrictions and containment measures, although OPEC’s own analysts have so far characterized the risk to the global economy as “slight and of short time”.

Even so, the market is almost universally expected to shift from deficit to surplus in early 2022.

OPEC + delegates say that with prices much better today than they were in early 2021, they believe they can absorb any collapse, given expectations that demand will return in the near future. the second half of 2022 to reach pre-pandemic levels above 100 million bpd.

Speculate at your own risk

The group has helped push Dated Brent up to around 50% over the past 12 months, from around $ 50 / bbl at the start of the year to current levels of around $ 76 / bbl., but with several wild swings.

Looming oversupply in the first quarter has already flirted parts of the Brent complex with contango in recent weeks – a bearish pattern that could undo OPEC + efforts to drain global oil stocks and support short prices. term.

But OPEC + officials have repeatedly warned traders not to bet against their ability to manage the market. Saudi Energy Minister Prince Abdulaziz bin Salman likes to say that speculators will find themselves “in water as hell”, reiterating this mantra most recently on December 14.

Arranging 23 OPEC + countries to agree on a policy is no easy task, and the market is not lacking in risks. Relations between members have been strained at times in 2021, including the UAE’s insistence on higher quotas delaying a July meeting for weeks.

However, the group was largely successful in balancing the rise in production while keeping prices from falling.

As a supply shortage intensified towards the end of the year, soaring crude prices brought external pressure from the United States, Japan and India for the group to step up its price increases. scheduled production.

These pleas were categorically rejected and the United States has since staged a planned series of SPR releases with China, Japan, India, South Korea and the United Kingdom which could hit the market within months. future.

OPEC + capacity decreasing

Until then, the market could be threatened with a reduction in supply anyway.

Many OPEC + members are already unable to meet their production targets, the result of years of underinvestment or mismanagement, exacerbated by the pandemic.

As Russia nears maximum capacity and Nigeria, Angola and several other countries struggle to maintain production, Platts Analytics predicts that OPEC + ‘s sustainable reserve capacity will decline to just 1.2 million. b / d by June, reducing the group’s ability to compensate for disruptions.

This unused capacity will increasingly be concentrated in Saudi Arabia, the United Arab Emirates and Kuwait, widening the gaps between the haves and have-nots of OPEC + – a dynamic that will need to be managed if the market requires more crude from the market. block.

“For OPEC + to remain united, it will have to become less flexible and dynamic to meet the wishes and needs of a very wide range of countries,” said Bjarne Schieldrop, chief commodity analyst at Swedish bank SEB.

A relaunched Iran nuclear deal could ease the market. The latest round of negotiations between the United States and Iran resumed in December, but the two sides remain deadlocked.

Platts Analytics expects that if a framework agreement can be signed in the first quarter with full sanctions relief in April, Iranian oil supply could increase by 800,000 bpd during the year.

But “the risks of a no-deal scenario remain high,” he said in a recent memo. “If a deal cannot be reached, there is simply not enough global spare capacity, even within OPEC, to meet demand, so prices would have to rise to encourage additional supply. , or destruction of the request may be necessary. “

Figure on another busy year of monthly OPEC + meetings, as the alliance seeks to bring the market back to pre-pandemic health – and beyond.